Press Release & Webcast Earnings Release FY18 Q2 Microsoft Cloud Growth Fuels Second Quarter Results Results include a net charge of $13.8 billion related to the Tax Cuts and Jobs Act REDMOND, Wash. January 31, 2018 Microsoft Corp. today announced the following results for the quarter ended 2017: Revenue was $28.9 billion and increased 12% Operating income was $8.7 billion and increased 10% GAAP net loss was $(6.3) billion and non-gaap net income was $7.5 billion GAAP diluted loss per share was $(0.82) and non-gaap diluted earnings per share was $0.96 GAAP results include a $13.8 billion net charge related to the Tax Cuts and Jobs Act (TCJA) This quarter s results speak to the differentiated value we are delivering to customers across our productivity solutions and as the hybrid cloud provider of choice, said Satya Nadella, chief executive officer of Microsoft. Our investments in IoT, data, and AI services across cloud and the edge position us to further accelerate growth. The following table reconciles our financial results reported in accordance with generally accepted accounting principles (GAAP) to non-gaap financial results. Additional information regarding our non- GAAP definition is provided below. All growth comparisons relate to the corresponding period in the last fiscal year. Diluted Earnings ($ in millions, except per share amounts) Revenue Operating Income Net Income (Loss) (Loss) per Share 2016 As Reported (GAAP) $25,826 $7,905 $6,267 $0.80 2017 As Reported (GAAP) $28,918 $8,679 $(6,302) $(0.82) Net TCJA Impact - - 13,800 1.78 2017 As Adjusted for TCJA (non-gaap) $28,918 $8,679 $7,498 $0.96 Percentage Change Y/Y (GAAP) 12% 10% (201%) (203%) Percentage Change Y/Y (non-gaap) 12% 10% 20% 20% Percentage Change Y/Y (non-gaap) Constant Currency 11% 10% 20% 20% GAAP results include a net charge of $13.8 billion related to TCJA, which is excluded from our non- GAAP results.
Microsoft returned $5.0 billion to shareholders in the form of share repurchases and dividends in the second quarter of fiscal year 2018. We delivered another strong quarter with commercial cloud revenue growing 56% year-over-year to $5.3 billion, said Amy Hood, executive vice president and chief financial officer of Microsoft. "Strong execution from our sales teams and partners is driving growth across our businesses." Revenue in Productivity and Business Processes was $9.0 billion and increased 25% (up 24% in constant currency), with the following business highlights: Office commercial products and cloud services revenue increased 10% (up 10% in constant currency) driven by Office 365 commercial revenue growth of 41% (up 41% in constant currency) Office consumer products and cloud services revenue increased 12% (up 11% in constant currency) and Office 365 consumer subscribers increased to 29.2 million Dynamics products and cloud services revenue increased 10% (up 9% in constant currency) driven by Dynamics 365 revenue growth of 67% (up 68% in constant currency) LinkedIn contributed revenue of $1.3 billion during the quarter with sessions growth of over 20% for the fifth consecutive quarter Revenue in Intelligent Cloud was $7.8 billion and increased 15% (up 15% in constant currency), with the following business highlights: Server products and cloud services revenue increased 18% (up 18% in constant currency) driven by Azure revenue growth of 98% (up 98% in constant currency) Enterprise Services revenue increased 5% (up 3% in constant currency) driven by Premier Support Services Revenue in More Personal Computing was $12.2 billion and increased 2% (up 2% in constant currency), with the following business highlights: Windows OEM revenue increased 4% (up 4% in constant currency) driven by OEM Pro revenue growth of 11% Windows commercial products and cloud services revenue decreased 4% (down 5% in constant currency) due to the impact of a prior year large deal Gaming revenue increased 8% (up 8% in constant currency) driven by Xbox hardware revenue growth from the Xbox One X launch Search advertising revenue excluding traffic acquisition costs increased 15% (up 15% in constant currency) driven by higher revenue per search and search volume Surface revenue increased 1% (relatively unchanged in constant currency) Business Outlook Microsoft will provide forward-looking guidance in connection with this quarterly earnings announcement on its earnings conference call and webcast. Webcast Details
Satya Nadella, chief executive officer, Amy Hood, executive vice president and chief financial officer, Frank Brod, chief accounting officer, Carolyn Frantz, deputy general counsel and corporate secretary, and Chris Suh, general manager of Investor Relations, will host a conference call and webcast at 2:30 p.m. Pacific time (5:30 p.m. Eastern time) today to discuss details of the company s performance for the quarter and certain forward-looking information. The session may be accessed at http://www.microsoft.com/en-us/investor. The webcast will be available for replay through the close of business on January 31, 2019. Non-GAAP Definition TCJA Impact. We recorded a net charge of $13.8 billion related to TCJA during the three months ended 2017. As of 2017, we have not completed our accounting for the tax effects of TCJA. Our net charge is provisional based on reasonable estimates for those tax effects. Changes to these estimates or new guidance issued by regulators may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. Our accounting for the tax effects of TCJA will be completed during the measurement period, which should not extend beyond the second fiscal quarter of 2019. We have provided non-gaap financial measures related to TCJA to aid investors in better understanding our performance. We believe these non-gaap measures aid investors by providing additional insight into our operational performance and help clarify trends affecting our business. For comparability of reporting, management considers non-gaap measures in conjunction with GAAP financial results in evaluating business performance. The non-gaap financial measures presented in this release should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. New Accounting Standards We adopted new accounting standards related to revenue recognition and leases effective July 1, 2017. The prior periods presented here have been restated to reflect adoption of these new standards. Constant Currency Microsoft presents constant currency information to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations. To present this information, current and comparative prior period results for entities reporting in currencies other than United States dollars are converted into United States dollars using the average exchange rates from the comparative period rather than the actual exchange rates in effect during the respective periods. All growth comparisons relate to the corresponding period in the last fiscal year. Microsoft has provided this non-gaap financial information to aid investors in better understanding the company s performance. The non-gaap financial measures presented in this release should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. Financial Performance Constant Currency Reconciliation
Diluted Earnings ($ in millions, except per share amounts) Revenue Operating Income Net Income (Loss) (Loss) per Share 2016 As Reported (GAAP) $25,826 $7,905 $6,267 $0.80 2017 As Reported (GAAP) $28,918 $8,679 $(6,302) $(0.82) 2017 As Adjusted (non-gaap) $28,918 $8,679 $7,498 $0.96 Percentage Change Y/Y (GAAP) 12% 10% (201%) (203%) Percentage Change Y/Y (non-gaap) 12% 10% 20% 20% Constant Currency Impact $124 $(26) $6 $0.00 Percentage Change Y/Y (non-gaap) Constant Currency 11% 10% 20% 20% Segment Revenue Constant Currency Reconciliation ($ in millions) Productivity and Business Processes Intelligent Cloud More Personal Computing 2016 As Reported (GAAP) $7,179 $6,758 $11,889 2017 As Reported (GAAP) $8,953 $7,795 $12,170 Percentage Change Y/Y (GAAP) 25% 15% 2% Constant Currency Impact $34 $49 $41 Percentage Change Y/Y (non-gaap) Constant Currency 24% 15% 2% Selected Product and Service Revenue Constant Currency Reconciliation 2017 Percentage Change Y/Y (GAAP) Constant Currency Impact Percentage Change Y/Y Constant Currency Office commercial products and cloud services 10% 0% 10% Office 365 commercial 41% 0% 41% Office consumer products and cloud services 12% (1)% 11% Dynamics products and cloud services 10% (1)% 9% Dynamics 365 67% 1% 68% Server products and cloud services 18% 0% 18%
2017 Percentage Change Y/Y (GAAP) Constant Currency Impact Percentage Change Y/Y Constant Currency Azure 98% 0% 98% Enterprise Services 5% (2)% 3% Windows OEM 4% 0% 4% Windows commercial products and cloud services (4)% (1)% (5)% Search advertising excluding traffic acquisition costs 15% 0% 15% Surface 1% (1)% 0% Gaming 8% 0% 8% About Microsoft Microsoft (Nasdaq MSFT @microsoft) enables digital transformation for the era of an intelligent cloud and an intelligent edge. Its mission is to empower every person and every organization on the planet to achieve more. Forward-Looking Statements Statements in this release that are forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors such as: intense competition in all of our markets that may lead to lower revenue or operating margins; increasing focus on services presenting execution and competitive risks; significant investments in new products and services that may not achieve expected returns; acquisitions, joint ventures, and strategic alliances that may have an adverse effect on our business; impairment of goodwill or amortizable intangible assets causing a significant charge to earnings; a change in our ability to earn expected revenues from its intellectual property rights; claims that Microsoft has infringed the intellectual property rights of others; the possibility that we may fail to protect our source code; the possibility that we may not be able to protect information on our products and services from use by others; cyber-attacks and security vulnerabilities that could lead to reduced revenue, increased costs, liability claims, or harm to our reputation or competitive position;
disclosure of personal data that could cause liability and harm to our reputation; abuse of our advertising or social platforms that may harm our reputation or user engagement; outages, data losses, and disruptions of our online services if we fail to maintain an adequate operations infrastructure; government litigation and regulatory activity relating to competition rules that may limit how we design and market our products; potential liability under trade protection, anti-corruption, and other laws resulting from our global operations; laws and regulations relating to the handling of personal data that may impede the adoption of our services or result in increased costs, legal claims, or fines against us; the dependence of our business on our ability to attract and retain talented employees; claims against us that may result in adverse outcomes in legal disputes; additional tax liabilities; quality or supply problems; exposure to increased economic and operational uncertainties from operating a global business, including the effects of foreign currency exchange; catastrophic events or geo-political conditions that may disrupt our business; adverse economic or market conditions that may harm our business; and changes in our sales organization that may impact revenues. For more information about risks and uncertainties associated with Microsoft s business, please refer to the Management s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors sections of Microsoft s SEC filings, including, but not limited to, its annual report on Form 10-K and quarterly reports on Form 10-Q, copies of which may be obtained by contacting Microsoft s Investor Relations department at (800) 285-7772 or at Microsoft s Investor Relations website at http://www.microsoft.com/en-us/investor. All information in this release is as of January 31, 2018. The company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the company s expectations. For more information, press only: Microsoft Media Relations, WE Communications for Microsoft, (425) 638-7777, rrt@weworldwide.com For more information, financial analysts and investors only: Chris Suh, general manager, Investor Relations, (425) 706-4400 Note to editors: For more information, news and perspectives from Microsoft, please visit the Microsoft News Center at http://www.microsoft.com/news. Web links, telephone numbers, and titles were correct at time of publication, but may since have changed. Shareholder and financial information, as well as today s 2:30 p.m. Pacific time conference call with investors and analysts, is available at http://www.microsoft.com/en-us/investor.
MICROSOFT CORPORATION INCOME STATEMENTS (In millions, except per share amounts)(unaudited) Revenue: Product $17,926 $18,273 $32,224 $33,241 Service and other 10,992 7,553 21,232 14,513 Total revenue 28,918 25,826 53,456 47,754 Cost of revenue: Product 5,498 5,378 8,478 8,959 Service and other 5,566 4,523 10,864 8,786 Total cost of revenue 11,064 9,901 19,342 17,745 Gross margin 17,854 15,925 34,114 30,009 Research and development 3,504 3,062 7,078 6,168 Sales and marketing 4,562 4,079 8,374 7,297 General and administrative 1,109 879 2,275 1,924 Operating income 8,679 7,905 16,387 14,620 Other income, net 490 117 766 229 Income before income taxes 9,169 8,022 17,153 14,849 Provision for income taxes 15,471 1,755 16,879 2,915 Net income (loss) $(6,302) $6,267 $274 $11,934 Earnings (loss) per share: Basic $(0.82) $0.81 $0.04 $1.54
MICROSOFT CORPORATION INCOME STATEMENTS (In millions, except per share amounts)(unaudited) Diluted $(0.82) $0.80 $0.04 $1.52 Weighted average shares outstanding: Basic 7,710 7,755 7,709 7,772 Diluted 7,710 7,830 7,799 7,853 Cash dividends declared per common share $0.42 $0.39 $0.84 $0.78 COMPREHENSIVE INCOME STATEMENTS Net income (loss) $(6,302) $6,267 $274 $11,934 Other comprehensive income (loss), net of tax: Net change related to derivatives (7) 280 (113) 243 Net change related to investments (878) (994) (1,166) (911) Translation adjustments and other (40) (592) 253 (474) Other comprehensive loss (925) (1,306) (1,026) (1,142)
COMPREHENSIVE INCOME STATEMENTS Comprehensive income (loss) $(7,227) $4,961 $(752) $10,792 BALANCE SHEETS 2017 June 30, 2017 Assets Current assets: Cash and cash equivalents $12,859 $7,663 Short-term investments (including securities loaned of $4,247 and $3,694) 129,921 125,318 Total cash, cash equivalents, and short-term investments 142,780 132,981 Accounts receivable, net of allowance for doubtful accounts of $337 and $345 18,428 22,431 Inventories 2,003 2,181 Other 4,422 5,103 Total current assets 167,633 162,696 Property and equipment, net of accumulated depreciation of $26,849 and $24,179 26,304 23,734 Operating lease right-of-use assets 6,749 6,555 Equity and other investments 3,961 6,023
BALANCE SHEETS 2017 June 30, 2017 Goodwill 35,355 35,122 Intangible assets, net 9,034 10,106 Other long-term assets 6,967 6,076 Total assets $256,003 $250,312 Liabilities and stockholders' equity Current liabilities: Accounts payable $7,850 $7,390 Short-term debt 12,466 9,072 Current portion of long-term debt 3,446 1,049 Accrued compensation 4,427 5,819 Short-term income taxes 788 718 Short-term unearned revenue 21,309 24,013 Securities lending payable 26 97 Other 7,787 7,587 Total current liabilities 58,099 55,745 Long-term debt 73,348 76,073 Long-term income taxes 30,050 13,485 Long-term unearned revenue 2,500 2,643 Deferred income taxes 3,186 5,734 Operating lease liabilities 5,640 5,372 Other long-term liabilities 4,820 3,549 Total liabilities 177,643 162,601 Commitments and contingencies Stockholders' equity: Common stock and paid-in capital - shares authorized 24,000; outstanding 7,705 and 7,708 70,192 69,315
BALANCE SHEETS 2017 June 30, 2017 Retained earnings 8,567 17,769 Accumulated other comprehensive income (loss) (399) 627 Total stockholders' equity 78,360 87,711 Total liabilities and stockholders' equity $256,003 $250,312 CASH FLOWS STATEMENTS Operations Net income (loss) $(6,302) $6,267 $274 $11,934 Adjustments to reconcile net income (loss) to net cash from operations: Depreciation, amortization, and other 2,536 2,166 5,035 3,982 Stock-based compensation expense 986 767 1,959 1,470 Net recognized gains on investments and derivatives (684) (652) (1,207) (963) Deferred income taxes (2,305) 5 (2,358) 545 Changes in operating assets and liabilities: Accounts receivable (3,908) (2,789) 4,041 4,398 Inventories 1,205 1,132 182 265
CASH FLOWS STATEMENTS Other current assets 354 1,300 36 335 Other long-term assets (344) (200) (622) (293) Accounts payable 938 99 531 (344) Unearned revenue (1,065) (1,077) (2,871) (2,884) Income taxes 15,974 843 16,635 1,407 Other current liabilities 643 (1,267) (1,521) (1,727) Other long-term liabilities (153) (301) 201 (283) Net cash from operations 7,875 6,293 20,315 17,842 Financing Proceeds from issuance (repayments) of shortterm debt, maturities of 90 days or less, net 3,759 (3,755) 49 (7,145) Proceeds from issuance of debt 3,229 17,069 7,183 42,046 Repayments of debt (3,327) (4,118) (4,496) (4,343) Common stock issued 189 131 496 372 Common stock repurchased (2,008) (3,599) (4,578) (7,961) Common stock cash dividends paid (3,238) (3,024) (6,241) (5,824) Other, net (156) 312 (306) 200 Net cash from (used in) financing (1,552) 3,016 (7,893) 17,345 Investing Additions to property and equipment (2,586) (1,988) (4,718) (4,151) Acquisition of companies, net of cash acquired, and purchases of intangible and other assets (27) (24,760) (206) (24,784) Purchases of investments (45,154) (46,775) (78,115) (103,956) Maturities of investments 6,352 8,715 11,578 17,374 Sales of investments 41,261 48,987 64,297 81,310
CASH FLOWS STATEMENTS Securities lending payable (177) 1,070 (71) 986 Net cash used in investing (331) (14,751) (7,235) (33,221) Effect of foreign exchange rates on cash and cash equivalents (17) (18) 9 (8) Net change in cash and cash equivalents 5,975 (5,460) 5,196 1,958 Cash and cash equivalents, beginning of period 6,884 13,928 7,663 6,510 Cash and cash equivalents, end of period $12,859 $8,468 $12,859 $8,468 SEGMENT REVENUE AND OPERATING INCOME Revenue Productivity and Business Processes $8,953 $7,179 $17,191 $13,615 Intelligent Cloud 7,795 6,758 14,717 12,855 More Personal Computing 12,170 11,889 21,548 21,284 Total $28,918 $25,826 $53,456 $47,754 Operating Income Productivity and Business Processes $3,337 $3,053 $6,343 $5,958 Intelligent Cloud 2,832 2,291 4,969 4,068 More Personal Computing 2,510 2,561 5,075 4,594
SEGMENT REVENUE AND OPERATING INCOME Total $8,679 $7,905 $16,387 $14,620